Privatization of Electricity Distribution in El Salvador - Summary Report

SAPRIN / EL SALVADOR

PRIVATIZATION OF ELECTRICITY DISTRIBUTION

IN EL SALVADOR

A SUMMARY REPORT

The Privatization of Electricity Distribution

Introduction

The privatizations in El Salvador are part of a set of institutional reforms contained in the Economic Stabilization and Structural Adjustment Programs that aim to liberalize the economy through the deregulation of prices, liberalization of trade and the redefinition of the role of the State through a process of privatization and targeting of public expenditure.

The orientation of the institutional reforms in the public sector is based on the persistent critique that there has been too much public intervention in economic activity.[1] Initially, the emphasis was placed on the distortion in prices and quantities derived from State action. The critique later moved towards the dichotomy between the “insufficiencies” in the public allocation of resources and the “always efficient private allocation.” In this area, the announced institutional reforms posed as a principal challenge the achievement of a smaller and more efficient State,[2] looking to increase the “confidence in the market and the private sector” as opposed to the “doubts and lack of confidence in the administration and planning” of the public sector.

Through the institutional reforms in El Salvador the implementation of the Program for Modernization of the Public Sector was implemented. This program includes the “modernization” of the energy sector. This program proposes the restructuring of the State bureaucracy in order to make it more efficient and reduce its costs, stripping the State of those activities and functions that are related to the provision of public services that the private sector could assume in a profitable manner, and helping to establish the institutional, legal and regulatory framework that will foster this sort of private investment.

Although the institutional reforms were presented with the label of “modernization of the State”, in the practice this has been translated into the generation of the conditions to facilitate the privatization of the public enterprises and, with it, the transfer to the private sector of the goods and services produced and distributed by the State. The international financial institutions argued that privatization was a basic condition for productivity growth and the maintenance of the competitiveness of the national economy. The Interamerican Development Bank sustained that the privatization of public services would permit “situating the country strategically in the global economy and developing infrastructure projects needed to promote exports.” [3]

The process of privatization

The process of privatization in El Salvador was begun in 1989, with the “privatization of the banks”[4]. This was presented as an indispensable condition for the liberalization of the financial system, condition that, together with the opening of trade and macroeconomic stability,[5] would allow the national economy to achieve adequate levels of economic growth.

In this way, with the privatization of the nationalized banks the first generation of the process of economic reform was inaugurated. In this context, and based on the approach that was developed by the Cristiani (1989-1994) and Calderón (1994-1999) administrations, privatization was proposed to reduce the size of the State, decrease the fiscal deficit, render better services and provide the State with immediate resources that would be used to cancel the short-term debt and invest in social infrastructure or other social expenditures.[6]

The second generation of reforms (between 1990 and 1993) began with the sale of the State enterprises that did not provide strictly public services, such as the cement factories, the hotels and the sugar refineries, among others. The sale of these public assets, together with the income from the re-privatization of the banks, only generated two million colons[7], which is a minimum amount if we consider that it was the State, through the Central Reserve Bank, that assumed the responsibility for the debt burden that was reported by the nationalized banks and valued at approximately one thousand seven hundred million colons[8].

Since 1993, steps were taken to prepare the legal framework and the design of the mechanisms for the implementation of the third generation of reforms, although these were not launched until 1996 with the privatization of the public services of electrical energy distribution, telecommunications and pensions. It is worth stating the interest expressed by transnational companies -- especially in the areas of telecommunications and energy -- in the acquisition of Salvadoran public enterprises coincided with the emphasis placed by the international financial institutions (Word Bank, International Monetary Fund and the Interamerican Development Bank) on the need to privatize these service sectors.

It is foreseeable that with the finalization of the privatization of the transmission and generation of electric energy, as already proposed, the process will continue with the privatization of other public services, such as the social security administration and the distribution of drinking water. This issue is currently being debated by various social, economic and political sectors in the country.

The institutional and regulatory framework

With the coming to power of the second ARENA government, the Special Commission for the Modernization of the State was created by Executive Directive, [9] establishing the legal and institutional basis for the process of “Modernization of the Public Sector”[10].

The objectives of the Program of Public Sector Modernization reveal the following purposes: a) reorient the role of the State towards the activities that correspond to it in a market economy; b) change the culture of the Public Administration in order to orient it toward values and attitudes of public service, transparency and responsibility; c) achieve an increase in the coverage, quality and efficiency of the services and actions under public administration; and, d) set up mechanisms of social control over the products and decisions of the Public Administration.

The first of the services considered for the process of privatization was the distribution of electricity. The establishment of a legal framework and the institutional conditions that would make possible the sale of the state’s electricity-distribution enterprises began in 1991. The first step was taken with the formulation of the draft bill to privatize this service[11], which was completed in 1993. This created the conditions for the privatization that was finally carried out in 1995.

As a precedent, in 1986 the Transitory Law of the Administration of Electrical Enterprises[12] established the devolution of the electrical energy distribution firms to the public sector (the Hydroelectric Company of the Lempa River, CEL, the parastatal enterprise for energy generation) after 50 years of having been administered under concession by private enterprises. However, eight years later, the same CEL prepared the basis[13] for the reconversion of the administration of electricity-distribution services through the creation of an Integral Plan for the Administration of the Public Service of Distribution,[14] establishing the need for the companies to be returned to the private sector and for the mechanisms through which to transfer part of the capital possessed by the distribution firms to the workers, employees and functionaries of the sector. This was incorporated in the successive legislation to legitimize the participation of the sector’s workers as company shareholders.

In this context, CEL was constituted as the principal generator, transmitter and distributor of electrical energy in the country, followed by the Company of Electrical Lighting of San Salvador (CAESS)—whose basic function was the distribution of electrical energy.

The fundamental steps to carry out the privatization began with the restructuring of CAESS, which consisted of the creation of two companies: the Electrical Company of the East (EEO) and Electrical Distributor of the South (DELSUR). The companies were initially created without their own assets and subsidized by CAESS until the end of 1996, when the conditions were created for them to become independent. Additionally, the company for the country’s western zone -- the Electric Light Company of Santa Ana (CLESA) -- was created and the General Superintendency for Electricity and Telecommunications (SIGET)[15] was constituted as the public entity responsible for guaranteeing compliance with the applicable laws and regulations related with the country’s electricity and telecommunications sectors.

The SIGET is defined as an autonomous institution whose maximum authority is the General Superintendent, named by the President of the Republic, who would serve for a period of seven years.[16] The responsibilities of the SIGET include setting maximum rates for low-use residential customers for a transitory period (initially proposed as a year, after which the subsidy would be progressively reduced), applying rates established for distributors in their own geographic areas, guaranteeing compliance with the regulatory requirements of the electricity sector and penalizing incompliance of said regulations, resolving conflicts between the operators and presenting the regulations for the institution itself, to be approved by the President of the Republic.

After the law creating the SIGET, the General Law of Electricity was passed and replaced the Law of Electrical Services from 1936.[17] The new law in effect has as its principal objective “to promote a competitive electrical market in El Salvador,”[18] which defines the role of the SIGET as the operator of the wholesale electrical market, as well as the coordinator of the transmission of energy from the generating plants, the security and the quality of the service, the operation of the transmission network and communication to the participants in the market about the economic effects of the transactions in system’s the regulatory market.

The General Electricity Law also establishes an “open competitive scheme” for the development of thermoelectric power generation in El Salvador. Under certain interpretations of the law, such an initiative need only be registered with SIGET and does not require approval by the Legislative Assembly. At the end of 1998, however, there was a draft bill presented to the Legislative Assembly proposing the privatization of electricity generation, beginning with the generation of thermoelectric energy.[19] This law would enable the generators to sell energy through the wholesale electricity market, which would consist of a market of contracts and a regulatory market for the system, based on a system of energy supply and demand.

In February of 1997, the Law for the Creation of the National Investment Fund in Electricity and Telecommunications (FINET)[20] was approved, and in July of 1998 the Law of the Investment Fund for Electricity and Telecommunications was passed as well. The considerations made in these laws emphasize that “electricity and telecommunications services are determining factors in the economic and social development of the population, and it is thus necessary to dictate norms to assure the most widespread coverage of these services in all the national territory, especially in the rural sectors and among the population with least income.”

The FINET was created with its own assets and administered by the Social Investment Fund for Local Development of El Salvador (FISDL). Although the legal representation of the FINET corresponds to the President of the Administrative Council of the FISDL, it will also relate to the other State agencies through the Ministry of the Economy.

The FINET has among its attributions: to subsidize the construction and improvement of the infrastructure for the supply of electricity and the provision of telephone services in low-income rural areas; subsidize electricity consumption and telephone services in low-income rural areas if these are “of communal benefit”. The law considers “of communal benefit” the consumption of electricity associated with projects of extraction, pumping and re-pumping of drinking water, as well its use in buildings that provide of education and health services if they are the property or under the administration of the communities, independent of the form in which they have been constituted or associated.

In April 1997, the law was approved for the sale of stocks in the Electricity Distribution Companies,[21] on the basis of which stock participation rates for each company are distributed -- 75% for wholesale investors and the rest for workers from the sector (20%) and for sale on the local stock exchange (5%). With the approval of the Legislative Decree No. 47, CEL is enabled to fix the price of the stocks for the workers at an equivalent of 80% of their book value at the time of the transaction.

The structure of the energy sector

The Ministry of the Economy is the entity responsible at a normative level for the management of the energy sector and the CEL is the autonomous institution responsible for the generation and distribution of electrical energy in the country.[22] The CEL possesses and operates the country’s biggest electricity generation plants, owns and operates the system of high voltage transmission, and administered the public distribution enterprises that were returned to the State in 1986 when their state-issued concession to private distribution companies of electricity ended. The CEL was also in charge of the sale of petroleum products from the private refinery (before the process of privatization of energy distribution), the establishment of electricity rates and the definition of the limits to the authority of the service companies. Related problems were managed by the Governmental Economic Committee.

The CEL constructed the four hydroelectric generating plants between 1954 and 1982, developed the high voltage transmission system that unites almost the entire country and constructed the power generation plants based on the use of petroleum products, as well as the geothermic plants. In addition to its own distribution system, CEL administered other distribution systems in the country, constituted by seven companies that participated in 87.5% of the total distribution of electrical energy. The remaining 12.5% was distributed directly by CEL.

As of May 1993, the electricity-distribution sector was composed of five companies, four of which (CAESS, CLESA, CLES, CLEA) were constituted as private companies, with CEL as the majority stockholder, while the fifth company (DISCEL) in charge of rural distribution, was organized as one of the seven managerial dependencies of CEL and, as such, was under the regime of the autonomous institutions of the public sector.

In 1996, before the process of restructuring CEL´s system of electricity generation and distribution, its total sales had a coverage of 94% of this year’s energy demand.[23] The energy transmission system was the object of two widespread and exhaustive programs of reconstruction, rehabilitation and expansion during 1996 that implied a significant amount of investment by CEL to reconvert the system.